Transferring property without a VAT charge is often desirable for the purchaser, saving both VAT and SDLT. It is the vendor, however, who has the responsibility for determining the rate of VAT and it is therefore the vendor who decides how far they are willing to go in accommodating the purchaser’s wishes.
A recent case regarding the sale of land with planning permission highlighted this tension between vendor and purchaser. The vendor, in accommodating the purchaser, showed how easy it is to make an expensive mistake: caveat vendor!
This decision will be relevant to property-owners looking to sell with planning permission and to purchasers of property, in addition to the practitioners advising them.
The decision
On 19 May 2022, a First-tier Tribunal decision was released in the case of Haymarket Media Group Limited [2022] UKFTT 00168 (TC). The vendor had not charged VAT on its supply of the property, despite having exercised an option to tax. HMRC asserted that VAT should have been charged and raised an assessment against the vendor, who appealed.
According to the vendor, the property was part of a business in two ways: as part of a letting business and as part of a development business. Both approaches would successfully remove the VAT charge, but had the vendor applied the rules correctly to the facts?
The judge found that the letting business was contrived; and that the property was an investment property, not part of a development business. While disappointing and expensive for the vendor, the decision is instructive and is set out in more detail further below. Businesses and their advisers will be better able to understand the following.
- Which activities involving property-ownership constitute a letting business for TOGC purposes?
- Which activities involving property-ownership constitute a development business for TOGC purposes?
- How careful should businesses and advisers be with their correspondence?
Background
The vendor owned a commercial property which it intended to sell with vacant possession and with the benefit of planning permission. The vendor had opted to tax this property.
The purchaser had agreed to pay £85m, in addition to which VAT would have been £17 million. As SDLT is calculated on the VAT-inclusive price, the VAT element would also have increased SDLT by £680,000.
The purchaser’s solution was to persuade the vendor not to charge VAT as a TOGC.
This is a common position for vendors. They wish to cooperate with the purchaser to complete the sale, but they are also faced with the risk of overstepping the TOGC requirements. After all, it is the vendor who will be assessed by HMRC if they do not charge VAT in a failed TOGC. On this occasion the vendor sought a Letter of Comfort from the purchaser. As the case was lost, the strength of this undertaking will now be tested.
For everyone else, some important points are raised in this case.
Letting business
The property had been let by the vendor and the property was genuinely a part of the vendor’s letting business. However, the vendor’s tenant vacated before the property transferred and the vendor had advertised the sale of the property as being with vacant possession.
Despite this, there was a tenant in place when the property transferred.
The tribunal focussed strongly on the substance of the letting activity, referring to multiple precedent cases which require all the circumstances to be considered regardless of what is written in a contract (Intelligent Managed Services [2015] UKUT 0341 (TCC); Secret Hotels2 [2014] UKSC 16; Airtours [2016] UKSC 21; Newey CJEU C-653/11, Loyalty Management [2013] UKSC 15). The tenant in occupation when the property transferred to the purchaser was described by the judge as “friendly” to the purchaser, noting that the purchaser had persuaded the vendor who was “less than enthusiastic about playing its part” and who had entered into the new leases prior to the transfer “purely to play its assigned role in [the purchaser’s] plan”.
The finding was unequivocal that there was no genuine letting business in the hands of the vendor which could be transferred to the purchaser. As a result there could be no TOGC of a letting business.
It is clear that the key is the substance of the letting business. This echoes the ruling in the case of The College of Royal Paediatrics [2015] UKUT 0038 (TCC), which also emphasised that, whatever the written contracts, in substance there had been no genuine letting business in the vendor’s hands. This is a wider point: both vendors and purchasers should consider substance over legal form when entering a TOGC, in particular whether the business is genuine when all the circumstances are considered in the round, regardless of the written contracts.
Development business
The vendor’s second contention was that they were transferring the property as part of a development business. Undefined in VAT law, a development business might be thought to include anything from a property with planning permission (or otherwise having an intention to develop), to a building site which has yet to reach practical completion.
A significant amount of resources (both time and money) had been spent by the taxpayer in increasing the value of the property with a view to developing it, including specialist advice and obtaining planning consent. It was argued that this was an economic activity, a business which was transferred before the development was complete, qualifying in the process as a TOGC.
This is a challenging area. The question of when an activity is a business for VAT purposes arises in many different sectors, from mining and oil exploration, to the issue and sale of shares for investment purposes, to charities, holding companies and property-owning entities.
It could be said there are two “golden rules” for transferring development property without a VAT charge: Golden Brick and Golden Oak.
- Golden Brick:
When owning development property, HMRC will accept that the supply of a development is zero-rated under the “golden brick” rule if the properties will be qualifying residential units which happen not to be complete. - Golden Oak:
Of wider relevance is the VAT-free transfer of a development business regardless of the properties being developed. This is the TOGC of an “active development” (The Golden Oak Partnership LON/90/958Z).
In the Haymarket case, the vendor argued that all the activity, time and expense that had gone into increasing the economic value of its property constituted an active development. The contention was that the transfer of the property with the benefit of this preparatory activity constituted the TOGC of a development business.
The Tribunal focussed on the investment nature of the vendor’s ownership of the land, contrasting Golden Oak with Gulf Trading Management Ltd (LON/99/842). Golden Oak had undertaken some infrastructure works (eg drainage) and had a genuine intention to continue development works before in fact selling the property. This transfer found to succeed as the TOGC of an active development business. However, Gulf Trading Management Ltd’s actions were limited to erecting some security fences and the sale of its property was found not to be the TOGC of an “active development”.
In reaching the decision that Haymarket had not planned to develop the property itself, the judge emphasised the importance of the initial intentions of the vendor. Evidence of the vendor’s initial intentions included advertising the property as a development opportunity (rather than a development business), the Heads of Terms which were agreed, even the written contracts exchanged which did not refer to a development business.
It is again clear that substance over legal form is key. When all the circumstances were considered, it was concluded that no active development business existed in the vendor’s hands.
Advisers beware!
One of the interesting aspects to the Haymarket case is that advisers’ private email exchanges were pressed into evidence by HMRC and counted against the taxpayer.
The judge repeatedly drew on statements made by the advisers in these emails as an indication of the genuine intentions of the vendor, being neither a development business nor a letting business, but the simple sale of a freehold property under an option to tax.
Both advisors and businesses should take care over their communications, on the expectation that a judge might one day review them.
Conclusion
The supply of a property as a TOGC is difficult to get right. In this case, the vendor did not and was required to pay £17 million in VAT; and the purchaser paid an addition £680,000 in SDLT. Penalties and interest would be additional.
The Haymarket case illustrates that, when a vendor is determining whether or not to charge VAT, it is important to consider all the circumstances and not to rely only on written contracts. Substance applies over legal form. In particular, a vendor should think carefully before following arrangements presented by the purchaser for the purpose of satisfying TOGC rules.
For letting businesses, tribunals and HMRC expect to see a genuine letting business by the vendor before the TOGC rules can apply. This might be planned, but should in any case be genuine with a measure of substance.
For development businesses, this exists for TOGC purposes when there is active development by the vendor. What is an active development and what is not? The dividing line has been explored in the Haymarket case, where planning consent alone was found to be too passive to qualify when the vendor clearly had no intention to develop the property. The sense from case law is that works to the property should have begun, but it is interesting to consider whether a genuine intention and momentum to develop a property could amount to an active development business, even if little work is done to the property despite a genuine intention to carry through the development. There are examples elsewhere of genuine businesses which have succeeded with similar arguments.
The last word goes to correspondence. Correspondence between a business and its advisor was presented in the Tribunal as adverse evidence in a case that was eventually lost. This should not deter businesses and their advisers from putting decisions in writing at an early stage, in fact this is important in later evidencing such decisions to HMRC and tribunals alike. It is however advisable, when discussing matters, to be aware that this text could come before HMRC or a judge.
If you were ever told to watch your words as a child, perhaps it was simply sound advice from a VAT adviser!
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Tribunal focus Letting - substance versus legal form Development - active development versus investment |
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What's the concern regarding VAT on property transfers? Supplies of the property are exempt in accordance with Item 1, Group 1, Schedule 9, VAT Act 1994, but become taxable when the supplier exercises an option to tax. An option to tax might be exercised for a number of reasons, generally in order to recover VAT on initial costs or to satisfy the requirements of a TOGC (transfer of a going concern) when the property was originally acquired. However, the resulting VAT charge on any subsequent supply of the property can cause difficulties for a purchaser who will often look to remove the VAT charge, perhaps because they are unable to recover input tax or simply to save SDLT which applies to the VAT-inclusive price. Removal of the VAT charge can be accomplished in a number of ways (Paragraphs 5-17, Schedule 10, VAT Act 1994), such as the property qualifying as residential or charitable use, or by disapplying the vendors option to tax (e.g. if a qualifying dwelling will be created or anti-avoidance rules apply). In the Haymarket case, another approach was taken, with the taxpayer arguing that the sale was not a supply for VAT purposes as it was the transfer of a going concern (TOGC). |
